James Fallows

James Fallows is a national correspondent for The Atlantic and has written for the magazine since the late 1970s. He has reported extensively from outside the United States and once worked as President Carter's chief speechwriter. His latest book is China Airborne.
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James Fallows is based in Washington as a national correspondent for The Atlantic. He has worked for the magazine for nearly 30 years and in that time has also lived in Seattle, Berkeley, Austin, Tokyo, Kuala Lumpur, Shanghai, and Beijing. He was raised in Redlands, California, received his undergraduate degree in American history and literature from Harvard, and received a graduate degree in economics from Oxford as a Rhodes scholar. In addition to working for The Atlantic, he has spent two years as chief White House speechwriter for Jimmy Carter, two years as the editor of US News & World Report, and six months as a program designer at Microsoft. He is an instrument-rated private pilot. He is also now the chair in U.S. media at the U.S. Studies Centre at the University of Sydney, in Australia.

Fallows has been a finalist for the National Magazine Award five times and has won once; he has also won the American Book Award for nonfiction and a N.Y. Emmy award for the documentary series Doing Business in China. He was the founding chairman of the New America Foundation. His recent books Blind Into Baghdad (2006) and Postcards From Tomorrow Square (2009) are based on his writings for The Atlantic. His latest book is China Airborne. He is married to Deborah Fallows, author of the recent book Dreaming in Chinese. They have two married sons.

Fallows welcomes and frequently quotes from reader mail sent via the "Email" button below. Unless you specify otherwise, we consider any incoming mail available for possible quotation -- but not with the sender's real name unless you explicitly state that it may be used. If you are wondering why Fallows does not use a "Comments" field below his posts, please see previous explanations here and here.

It's this one, from the "Geo-Graphics" feature on the Council on Foreign Relations site today:

What does it show? That when the Chinese government let the value of the RMB go up starting in 2005 (rising red line), two things happened. Chinese exports grew more slowly and in the depth of world recession actually went down (descending blue/black line), and Chinese household spending went up (rising green line).

Then, when the Chinese government froze the RMB's value again starting in 2008, both those trends stopped or reversed.

It really is amazing when real-world economic data turns out the way supply-demand charts would predict!

As a reminder, the point of urging/enticing/persuading the Chinese government to let the RMB go up again is not to move any specific factory from Xiamen to Sheboygan. It is to encourage exactly the two trends shown by the black and green lines: lower overall export surplus from China, and greater overall household spending within China. This chart suggests that it actually worked that way the last time around.

I mentioned on Friday that I thought the US Government's mixed message about trade relations with China was actually a sensible balance, as opposed to a mish-mash or an internal contradiction. Treasury Secretary Geithner's statement said that the U.S. expected that the Chinese government would continue letting the value of the RMB rise, which will remove an impediment to bringing China's export-heavy economy into better balance with the rest of the world. But Geithner did not declare the Chinese "currency manipulators," which would have generated a lot of friction without doing any good. Similarly, the US government said it would support a trade complaint, about Chinese subsidies for clean-energy exports -- but would do so via international bodies, rather than making it a head-to-head US-China fight. By my lights, the right mixture.

A few followups. First, from the Economic Policy Institute, data about the trends in clean-energy trade. This one shows the US-China bilateral balance:

Of course of course of course, bilateral patterns don't necessarily tell you anything about either the country's overall performance. So here is a chart showing that America's trade performance in clean-energy tech with the rest of the world has been rapidly improving, even as it has worsened with China.

And "of course of course" again, graph lines don't prove anything about causation, let alone "fault" or "unfairness." But there is enough other reason for scrutiny of Chinese-government efforts in these areas to bear inspection -- which is what the government case is about.

After the jump, a reader's note about the Chinese government's conformance with international "rules" in the broadest sense.

Today the Treasury Secretary, Timothy Geithner, once again postponed a determination of whether the Chinese government was practicing "currency manipulation." Reports on this topic are due each April 15 and October 15; this is essentially the same thing he did the last time around.

For reasons laid out yesterday, I think this makes sense. Update notes:

1) Geithner's brief statement makes clear that the goal is to keep the RMB moving (without an exact target), and that in the past few weeks the Chinese government has been doing just that:

>>Since June 19, 2010, when China announced it would ... allow the exchange rate to move higher in response to market forces, the Chinese currency has appreciated by roughly 3 percent against the U.S. dollar. Since September 2, 2010, the pace of appreciation has accelerated to a rate of more than 1 percent per month. If sustained over time, this would help correct what the IMF has concluded is a significantly undervalued currency.<<

2) Today the U.S. government also said it would further investigate a complaint, initiated by the United Steelworkers union, about Chinese government subsidies for a variety of "clean energy" projects -- toward an end of taking this complaint, and others, to the World Trade Organization. Again: by the standards mentioned yesterday, good call. Using some of the broad range of U.S. leverage; recognizing (as governments everywhere have) the extent of Chinese government intervention in these industries; and -- crucially -- preparing to take it for international jurisdiction rather than making it a head-to-head US-Chinese issue.

3) Many, many notes from Chinese readers, and some from Americans too, have included an assertion like this one (from a person with a Chinese name): "If I'm not mistaken, the goal of forcing the value of RMB up is to increase the american export [to China]."

Let me put this tactfully: NO NO NO NO NO NO NO. As I've tried to argue over the years - for instance here, here, here -- this isn't the problem, and for that problem (American exports and jobs) whatever the RMB does will not necessarily be the solution.

The problem for the world's economies is chronic imbalance: too much production, reliance on exports, over-investment (yes, it's possible) and under-consumption in some countries, mostly China; and too much consumption, reliance on debt and imports, and over-consumption, in some other countries, mostly the US. You can't and don't balance those accounts on a purely bilateral basis -- mandating that America sell more to China, and China less to the US. That's like thinking you lose weight by just concentrating on what you have for lunch. You balance them by ensuring, overall, that China's economy comes into a less distorted relationship with the rest of the world's -- and America's, from its opposite type of distortion, does too.

In the short run, a rise in the RMB might actually worsen the US-China bilateral imbalance, because China's the only place on Earth where certain products are now made, and a stronger RMB means they'll be more expensive. Nonetheless, it's worth pursuing, because excessive Chinese exports make it harder for the whole world economy to rebound. (And it will take a very long push, for reasons explained here.) It will also take a very long push to improve the fundamentals of American exports, income distribution, and job creation, but that really is separate from the RMB. Bringing China's economy into better balance with the world's -- and doing the same with America's -- makes it easier to solve America's job problems, but it's just a start.

4) I mentioned yesterday that in July and August, the Chinese authorities seemed to be backsliding -- letting the RMB fall again against the dollar, before resuming a rise in early September. Several readers have pointed out an extenuating factor: the Euro was falling against the dollar at that same time, so measured against the whole world trading system, the RMB wasn't falling that much. (China has more total trade with Europe than with the U.S.) Noted.

Last night I complained about Chris Coons's habit, in his televised Delaware "debate" with Christine O'Donnell, of beginning most of his responses with, "there's too much here to respond to." But that is sort of how I feel at the moment about the RMB. Let me make three points and then offer a bonanza of links and excerpts for your spare-time reading.

Tomorrow the Treasury Department will release its findings about whether China's (uncontested, obvious, and indisputable) central-bank efforts to hold down the value of the RMB amount to "currency manipulation." Those findings were originally due six months ago, but the declaration was deferred until now (and can in theory be re-deferred indefinitely). [Update: My mistake. The reports are due each April 15 and October 15. Last April's was deferred to July. The judgment on "manipulation" can be indefinitely deferred.] Here's my guide to the news:

1) What the US wants. Or what it should want, if it fully had its wits about it. What it wants is continued movement in the RMB's value against the dollar. Not a sudden one-time jump in value. (For another time: why "sudden" change is almost never what you want from the Chinese government, in any area.) Not a specified new target exchange rate. Just a demonstration by the Chinese authorities that they understand that the currency's value has to go up, and they're not going to prevent that process -- as they foolishly tried to for a while this summer.

Background: the dollar/RMB rate was essentially frozen, at just over 8 RMB/$1, for many years until late 2005. Then for about the next two and a half years, the Chinese government allowed a "managed float," and the RMB rose against the dollar until it reached a level of about 6.8/$1 in mid-2008. Once the world financial crisis hit and demand for Chinese exports plummeted, to protect its struggling export industries the Chinese government froze the RMB's value once more.

This chart (from Yahoo Finance) gives the idea. The chart shows the value of the dollar -- so a declining line means a stronger RMB. The truncated vertical scale exaggerates the degree of change, but it accurately shows the trend:After the Obama Administration avoided declaring China a "currency manipulator" this spring, the Chinese government let the RMB start appreciating again. This was assumed to be a pre-greased understanding: as long as the Chinese government wasn't forced to "knuckle under" to foreign pressure, it could start moving in the right direction. Then, after a very short time, the appreciation stopped -- this chart shows the movement over the past year:

What we're seeing here: the essentially frozen exchange rate until June of this year, then the brief strengthening of the RMB's value through June and until early July -- and then the reverse trend, through much of the summer, of the RMB weakening again against the dollar. Finally, starting about a month ago, the Chinese government let the RMB's value start rising once more.

The US wants the recent trend to continue. We can argue about faster, slower, or the right "eventual" value for the RMB. But as long as its value is rising, the Chinese government is playing ball; and if it ever stops rising, the Chinese government is being deliberately uncooperative. That's what it did for two difficult months this summer -- the stretch on the graph above from early July to early September.

2) What tools and weapons the U.S. has. It might seem that the "big" weapon here is the "currency manipulator" label, but there is little reason to think that would do any good (beyond sounding tough). For one thing, it is guaranteed to strengthen the hand of the "Hell no, we won't bow to the foreigners!" camp within the Chinese government. Worse, it creates the "shot the wad" problem. Having exercised this threat, the U.S. doesn't have a convenient next step to take -- or threat to hold in reserve. Moreover, applying this label to China would open up endless subsequent arguments about when and whether China could ever come off the "manipulator" list.

So the tools are those that -- frustratingly, but this is life -- constitute the entirety of America's relationships with China now and for the future: the whole spectrum of diplomatic, financial, trade, strategic, educational, technical, military, and other contacts between the countries. These can be on a generally-improving track, or a generally-deteriorating one. Neither country has a simple, clear, all-determining lever to use on the other; each has a wide range of influences. The US can and should use everything in the arsenal, rather than the simple "We Think You're a Cheater!" label.

3) The strategic edge for America. In many matters, the U.S. is accustomed to being the big bully everyone else loves to resent. On these currency questions, amazingly enough, it's much closer to "the world, including the US, versus China" than to "everybody else, including China, against the US." China's currency policies are a more acute threat and annoyance for Brazil, Korea, Singapore, India, Japan, some European countries, and others than they are for America. As I've argued before, the Chinese government can be surprisingly clumsy and ineffective in building international support and alliances. We can be those things too -- but in this case, world opinion is more on our side than theirs.

Accordingly, the US should do everything it can to make this a big, multilateral, "nothing personal" issue. It should take cases to the World Trade Organization whenever possible. (The Chinese officials have an easier time accepting a WTO judgment than a "demand" from the United States.) It should use big international forums, like the G20 meetings. It should let other countries take the argumentative lead wherever it can.

So: watch the news tomorrow -- and next week and next month -- for evidence that the US is keeping up pressure on China for steady, consistent appreciation of its currency. But don't expect to see an immediate jump in the RMB's value. And don't hope to see a "manipulator" declaration. That would be a sign of desperation more than of success.

As reported yesterday, the US-China "currency manipulation" showdown is past for the moment. The underlying issue -- China's insistence on keeping its RMB at an artificially low level, which ends up keeping the US dollar artificially high -- is far from resolved. But it won't be forced to a head this month.

That doesn't mean that our coverage is over! Herewith a note from Bill Bikales, an American economist who has lived for years in China, about how the situation looks from Chinese officialdom's point of view. I think his explanation is right, and it's different from what I've seen elsewhere spelled out quite this clearly. He writes (emphasis added):

We both know that China is not particularly inclined to accept US advice, or pressure, on this or any other important policy matters. But I think that the "China never gives in to foreign pressure because of its century of humiliation" explanation that appears so often in the press is superficial and misleading.

As I see it, China is asking a question to which there is no easy answer; what right does the US have to lecture anyone on economic matters now, having played so large a part in causing the current global recession through loose monetary policy, poor risk management by some of our most prestigious companies and monumental regulatory failures? They are responding to the continued US belief in American exceptionalism, that we can do whatever we do, right or wrong, and ignore the criticisms and demands of other countries who often bear the consequences of our actions, while we continue to insist on our right to criticize and make demands on them. As Brad Delong and Stephen Cohen have pointed out, the US simply no longer has the economic clout to get away with this any longer, and who better than China to stand up to it?

As far as the RMB goes, surely it is far more important for the global economy that the US deals with its huge fiscal problems than that China lets the RMB appreciate? To which we reply - reasonably enough - that this is not the time to do so, yet, until we've recovered from the recession. (Although many doubt, also with good reason, that we will deal with the fiscal mess even then.) But in that case China's leaders expect us to accept their own assurances that they are also going to deal with the RMB issue once the global recession has passed and they are confident that they can do so without causing a major slowdown and loss of jobs in their country. As they were indeed doing before the financial crisis. Yes, we had no or negative growth over the last two years, and China had 9-10% percent growth in both, but our standard of living is still 15 times greater than theirs. Their imperative to keep growing rapidly in order to catch up with the advanced economies is as powerful to them as is our own need to shift from -2% growth to +3%.

It is this underlying asymmetry in the whole RMB brouhaha that China is responding to.

For some reason the notice is not yet published at the Treasury Department's Press Room site -- presumably it will be up there soon This afternoon Timothy Geithner announced that he would delay a report, normally due on April 15, about the trade and currency-exchange policies of other major world economies. This report has been a diplomatic ticking time-bomb, in that Geithner would have to announce whether China's refusal to let its RMB rise against the US dollar amounted to "currency manipulation." This is a judgment that would have triggered other political and legal actions by the U.S. government, and that he would have been delivering two days after Hu Jintao had come to Washington to discuss cooperation with the U.S. on efforts against nuclear proliferation. Just as a matter of protocol, the obvious and apt comparison would have been to Prime Minister Netanyahu's recent gracious welcome of VP Biden to Israel.

As mentioned earlier today and in the preceding five or six posts (complete links when we have "categories" again), I think that, completely apart from the timing, applying the "manipulation" label would have been pointless, self-indulgent, short-sighted, and actively harmful. Geithner's finessing of the whole issue seems like a nice way out of the predicament -- which clearly must have been worked out with the Chinese government as part of the deal for Hu's visit.

Geithner's official statement, quoted after the jump (from numerous news versions available), puts it in the right big-picture perspective: the world's economies have to get into better balance, and currency values are a big part of this. But let's work it out in a non-moralistic way.

This is a much better result than it could have been. Geithner's statement is below.____